MauledAgain

Prof. James Edward Maule's more than occasional commentary on tax law, legal education, the First Amendment, religion, and law generally, with sporadic attempts to connect all of this to genealogy, theology, music, model trains, and chocolate chip cookies. Copyright 2004-2019 James Edward Maule.

Friday, April 30, 2004

What is a Post-Modern Student?

Or, better yet, what is an MTV generation student? Or a post 9-11 student?

Why do I ask?

Prof. Ann Althouse of Wisconsin Law has posted some questions about my classroom clicker post.

After quoting this part of my post:

The typical post-modern student wants to be passive, to be fed information, and to regurgitate it. That's been the educational experience of most of these students. (Too) many of the teachers that these students have encountered, eager for high rankings on student evaluations, prefer to play to the crowd, placate the desires of students weaned on television, and refrain from pushing students to become active participants in their own education. …

If indeed post-modern culture prevents a return to the days of holding students responsible by putting them on the spot, de-valuing their baseless complaints on student evaluations about work load and academic expectations, and failing those who fail, then perhaps getting them involved by "making the work fun" is worth the effort. The clickers are toy-like, they are almost identical to the TV remote with which the student is deeply familiar, they are snazzy and exciting, and they equalize the participation level at something other than zero. Faculty using the clickers claim that the students are enthusiastic about them. That's not a surprise. So surely it's worth a try.

Hmmm.... which side is he really on? When did we cave to "post-modernism"? Do young people today really see themselves in these terms or are they tired of being characterized as the MTV generation and so forth? Aren't we post-9/11 now, so that it's not too late to talk about a serious world of real values and consequences?

I've never seen a personal statement in an admissions file that was all about how the applicant has been spending his life so far playing video games and is hoping to find some snazzy, exciting, familiar devices to play with in the classroom. Nearly every file portrays an individual who is serious about taking on the challenges of learning how to be a lawyer and who has a strong record of independent, responsible academic achievement. No one writes, I'm looking for a place where the teachers will hover over me and feed me information and expect to see me glazed and numb unless they excite me the way TV excites me! On paper, every applicant is hot for a big challenge. I want to hold them to their own representations, not shrug and view these idealized self-portraits as a post-modern joke. Let the joke run the other way: we take these things seriously, we believe you are adults, we think the practice of law is challenging and serious and important, and we are going to treat you like the person you claimed to be when you applied to this school and made us believe you deserved to sit in that seat you are slumping back in right now!

I think some of us (Prof. Althouse, and I, and others, excluded) have indeed caved to the student desire to be fed information. I've seen it. I don't intend to yield, but I seek the carrot that will re-ignite the enthusiasm that brings the applicant to the law school and that too many of them lose by the time they reach my class.

There is something very fascinating about the disconnect between the admissions applications and the passivity evident in too many law school classrooms. For decades, every law school applicant has expressed a desire to acquire a legal education for use in doing good in the world or for changing the world for the better, and yet for at least the past 20 years many of us have observed a shift from classrooms in which the students carried their principles into open discussion to classrooms in which students feverishly take notes, play games, or otherwise withdraw from active participation. I do think most (though not all) law school applicants mean what they say; I've met too many money-hungry power-seeking law students to think that all of them mean what they say. Perhaps there's a connection between these attitudes and the existence of a higher value on taking and absorption than on giving and sharing? I may be a cynic, but there's no question in my mind that the very intelligent pool of individuals self-selecting themselves for application to law schools know how to write admissions essays, and so I don't think the admissions process helps at all in separating applicants on the basis of their genuine goals.

I'm completely in favor of encouraging, compelling, cajoling, and even shoving students into accepting responsibility, not only for their education and for their budding legal careers, but also in their lives generally. There is a disconnect between "the person [the student] claimed to be when [he or she] applied to [law] school" and the disregard of responsibility that some law students manifest. By second year, at least, some students put more energy into finding shortcuts than in immersing themselves into the law.

This isn't to paint all law students with a broad brush. Many of them arrive mature, responsible, eager, diligent, honest, and driven. They hold to those traits, and they do well. They bring honor to the school. But even some of these folks, who blossom in clinics and take the lead in pro bono activities, crawl into shells when they're in the classroom. They're doing the work, but they're living in the cone of silence. Perhaps it's appropriate to say, "You are an adult. You can choose to speak or be silent." Yet there are those who would say that the student has a responsibility to participate both in the classroom and in their out-of-class preparation and assimilation. How can we, the faculty, make that happen?

Law faculty use all sorts of "techniques" to hear their students' voices: calling on students randomly, publishing in advance lists of students on whom they will call on a given day, meeting with students outside of the classroom before class, offering grade bumps for volunteering, and more. My experience and the experiences shared by my colleagues are very similar. Maybe Paul Caron is right: students fear saying something in front of their peers that would cause them embarrassment or ridicule. But isn't the practice of law filled with opportunities for lawyers to speak in front of peers, at the risk of being embarrassed or ridiculed? Interestingly, students in my courses aren't "shy" about communicating through email. I'm flooded with messages, and I encourage it. I prefer that they post to the digital classroom discussion board, and I tell them that, but they rarely do, mostly, as they tell me, because it's not anonymous.

As for the students who "give up" and prefer to distract themselves during class, my conjecture is that something happens to them between admission to law school and their arrival in my courses. I think they are disillusioned. I think they are disappointed to learn, though it is no surprise, that only 10 percent of them are in the top 10 percent (a place many of them inhabited while in college), and they're not in that group. They discover that law and the practice of law aren't as television portrays them. They decide that the law can crush idealism faster than the blink of an eye.

Though, as I've noted, many of them, far more than the top 10 percent, keep plugging, having heard the stories of students whose grades zoomed up in the second year, it's a sizeable group that "gives up." They shop for the outline from the student who took the course the previous year, surrendering the opportunity to learn through creating one's own outline. A few go so far as to cheat. Others complain on student evaluations and sometimes in direct conversation, "Just tell us what the law is," "Don't ask us questions that you don't answer," "There's too much to read," (that in response to a reading load of approximately 25 pages per class), "Don't make quiz results turn on the difference between two words... that's ridiculous," and "Doesn't this guy know that there's a lot more we have to do in our lives than prepare for his course?" (These are some sample quotes, and there are many others that say the same thing in different words.) I've addressed many of these complaints in a series of law school newsletter columns:Money for Nothing and Work for Free?, Crumbling Myths & Dashed Expectations, Learning to Teach and Teaching to Learn, and Time CAN Be on Your Side: Or at Least by It.

Perhaps the students are different at Wisconsin than they are here at Villanova, but I doubt it. Prof. Althouse and I share the same goal, that is, to persuade students to bring their full slate of academic skills into the classroom through preparation, participation and assimilation. We disagree on how to get there. We're not alone in our concerns and our advocacy of one or another approach, for surely the Journal of Legal Education is loaded with articles addressing one or another of the issues enveloped in the "class participation" discussion. I'm not ready to confer "the answer" on classroom clickers, but I really do want to try. Most of the techniques I have used and that I have observed others using have generated disappointing poor results; for me, only the "during semester" in-class and out-of-class exercises and quizzes have had a noticeable impact.

Almost ten years ago, a student came up to me after class and said, "We notice that you are frustrated with our inability to follow your reasoning past three steps." "You are observant," I replied. The student, who was a few years older than most of his classmates said, "Understand that we are the MTV generation. We aren't accustomed to concentrating on any one thing very long. We struggle to visualize words and what they mean." Shortly thereafter I created my first "moving" Powerpoint slide set. Was I "giving in"? Yes and no. Though I won't relent in demanding that students contribute to their own education, I'm willing to operate in an environment with which they are familiar. They need pictures? Fine, I'll make pictures. They want remote control? Fine, they can have clickers. Especially if it counteracts their desire to be quiet and passive in the classroom.

If all that the classroom clicker does is to entice students into a "getting into it" mindset and to keep them there, even in the face of less-than-desired class rankings, the disillusionment of discovering law isn't what they thought it would be, and the frustrations of learning to think in a new way, then it will be a worthwhile approach. If it helps them feel "involved" in the material, great. If it compels them to think, marvelous. And if it means I can double or triple the number of in-class quizzes throughout the semester and to quadruple the number of times I learn whether the students are "getting it," stupendous.

Perhaps giving students some classroom anonymity at the expense of some of their autonomy is a necessary trade-off. It's not ideal, but law faculties have yet to invent the ideal. Prof. Althouse, and I, and others, will keep searching. And we'll keep discussing and debating and writing about it. And from time to time we will share our thoughts and our plans. I surely hope I'll have an opportunity to share classroom clicker experiences. So write to my Dean and tell him to buy me some clickers. Thanks.

The LanSkool Experience

The use of clickers in the classroom is a technological advance on a more elaborate and complicated approach that I used in the early and mid 1990s when teaching Computer Applications in the Law (later Digital Legal Practice Skills) and Computer Applications in Tax Law. These courses, introduced in the late 1980s when most law students had little computer skills, gave students the opportunity to learn how to use spreadsheets, databases, communications programs, and even a little BASIC programming in the context of handling legal issues in subject areas that they had already studied. The Computer Applications in Tax Law course (an LL.M. (Taxation) course) was limited to tax issues, and much to the surprise of faculty and students alike, the Computer Applications in the Law and Digital Legal Practice Skills course (both in the J.D. program) involved all sorts of law school topics and very little tax.

The course was taught in a classroom adapted for these courses. There were 24 desktop computers, networked to each other and to a desktop available for the professor. The course was limited to 24 students, but became so popular that I agreed with the Associate Dean to allow 48 students to enroll, by putting them into teams and having each team use a desktop. When advance enrollment reached into the mid 50s, I succumbed and let the extra 6 or 8 students squeeze into the back row.

These were the first course in which I discovered that what came to be called "active learning" really did improve the education of the law students. They were given problems to work through, both in class and out of class. One year I had the entire class, as one team, design a litigation control database. It was challenging to manage but the students learned a lot, not just about litigation control and tracking, but about working in teams.

The school purchased a program called LanSkool, which permitted the professor to "see" what was on the screens of each of the desktops hooked to the network. It was cumbersome and slow, but it worked. It also permitted the professor to "take over" one, several, or all of the desktops, so that the students could "see" what the professor was doing as something was explained. And it permitted the professor to take what was on one student desktop and "beam it" to all the desktops. It enhanced collaborative learning, and it was fun.

Of course, I did not tell the students that this capacity existed. The course had been taught for 3 or 4 years before we "discovered" and acquired LanSkool. I had noticed that some of the students were using their desktops to do the same sort of thing that students today do with laptops, hand-held devices and cell phones. They were surfing the web, sending and reading email, playing solitaire, etc. They INSTALLED on the network (clever, aren't they?) a multi-player golf game.

So, during the first class after LanSkool was installed, I "surfed the desktops" and of course found the golf game underway. So I said to the class, "What club to use here?" and it was GREAT to watch the puzzled faces turn to shock as I "beamed" the golf game screen to the entire class. That did it. That ended the solitaire, email, and everything else that was a distraction. Oddly, I was able to do the same thing with the next class, causing me to wonder if the student rumor mill was more hype than reality. By the third semester with LanSkool, the word was out.

Many law faculty think it is horrible to embarrass a law student in this or any other manner. Once I asked a law student if she needed help with the down or across words in a puzzle she was doing during class, after several classes of general warnings about the negative impact on professionalism of doing crossword puzzles in class. How students manage to get to my second year courses thinking that lawyers in a courtroom, a client interview, a meeting with a partner, or a deposition can do crossword puzzles or play Solitaire is easy to understand, because a walk past first-year classrooms (where the door is in the back) will bring within sight dozens of laptop screens, with Solitaire being readily visible on many of them.

If and when wireless networks are installed in our classrooms, it might be beneficial to install today's equivalent of LanSkool (which apparently no longer is marketed under that name). There are many ways of sending the same message, and if one way fails, use another.

Oh, the courses in which I was using LanSkool? They were "shelved" so that I could pick up the Decedents' Estates and Trusts course. By that time, law students were arriving with pretty good computer skills and the shelving of the courses would not have an adverse impact on the students.

The clicker is a device that a student uses to send an instantaneous response to a computer that the professor can access to see the responses. The appeal of the clicker is its suitability to promoting "active learning" in the classroom, which is an attempt to shake post-modern students out of what Paul calls the "cone of silence." It lets all of the students, rather than a few (whether volunteers or persons selected by the professor), participate. It keeps them focused on the course, and makes distractions dangerous. It could (and Paul says it does) put an end to cell phone messaging, game playing on laptops, web surfing, and other activities that students somehow think will make them better lawyers when they are retained by a client with a problem involving issues studied in the course in which they are presently enrolled. It encourages attendance. The key to making the clicker approach work is that each one is "tagged" to a particular student, so that the professor knows who is responding to a question, and who isn't.

It didn't take long for other law faculty to respond. For example, Prof. Ann Althouse, who's at Wisconsin Law, explains in her blog posting on classroom clickers that her first reaction was "a childlike I-want-one-for-Christmas-too attitude." She explains her familiarity with the cone of silence. I, too, know the cone, and Ann, I'm totally with you on wanting a clicker system (and I want it NOW! (grinning)). Rather than posting on this topic yesterday, I invested the time sending emails to the dean and faculty with the topic, "I Want (Uh, Need) This ASAP". (I learned the "need" thing from my children.) True to form, by the time the committees are formed and the issue slogs through the law school bureaucracy, these clickers will have been made obsolete by some sort of direct brain wave measuring device.

And that takes us to Prof. Althouse's concern that the use of clickers will interfere with student classroom autonomy, something that she asserts "[s]tudents deserve." She writes:

By law school, they are adults and they should be taking responsibility for their education. They will soon enough have clients relying on them, and there will be no lawprof wired in to supervise whatever they decide to do. With classroom autonomy, students can play video games or blog or IM or sleep or think about their personal affairs or even engage and learn something. The consequences are there and they will need to live with them come exam time. If they aren't up to keeping track of their responsibilities autonomously, why should they be unleashed with law licenses on an unsuspecting public?

I disagree. Once upon a time, I had the same outlook. But then I changed my mind. Why? Almost a decade ago, I reached the frustration point when, for the umpteenth time, a student sat in my office in late February, reviewing a not-so-wonderful grade from a course taken in the fall. (Why it takes 2 months for grades to be released, at a point when the student barely remembers the exam (and I have lost a good deal of my familiarity with it) is another topic that needs some serious attention, but not today.) In tears, the student kept saying, "If only I knew that I had a totally wrong approach to the material." I asked myself, "Why didn't this student know?" and "Why is this such a pattern, that students don't know that they are not learning properly and I don't know that they're missing the boat?"

The answer was two-fold. I couldn't do much about one, but I could do something about the other. Why the student had reached the second year of law school devoid of some basic lawyering skills was a question I could answer, but was a problem over which I had (and still have) no control. Why the student was not learning from me how to learn, how to analyze problems, how to plan, and how to write answers was a reflection, perhaps, on my teaching. I decided that I would give feedback to the students during the semester, so that they could make adjustments in their learning process before it "was too late." It would also help me understand which aspects of my teaching were working and which ones were not.

Thus I started the practice of administering "exercises" during the semester. The exercises require students to describe what additional facts must be obtained from the client, to identify flaws in statements made by hypothetical practitioners, to contrast statutes and regulations, and to engage in a variety of other lawyering tasks. Some of the exercises require short answers and are administered through the digital classroom. Others are administered, in class, without notice. These may consist of multiple choice questions, true/false questions with explanations, argument selections, chart completion, or some other design that minimizes the need for extensive writing. Because students might have legitimate reasons for missing class, and because I do not want to sit in judgment of each reason or excuse for an absence (based on experience using that approach), I let the students drop the two lowest scores of the ten scores. The total score from the 8 exercises with the highest scores counts for one-third of the course grade.

Does it work? Yes. That is, there has been improvement. Rather than leaving the students to their own pursuits in the classroom, my parentalistic approach of "getting on them" (as they describe it) has increased the level of preparation, has compelled them to assimilate long before the traditional cram time of the exam period, has alerted them to basic flaws in their learning algorithms that weren't previously identified in their educational careers, and has spilled over into their achievements in other courses. It must work. Some (too few) of my colleagues have followed my lead, though with variations and alterations, as they, too, try to deal with similar issues. The students complain bitterly until the middle of the semester, when the tide begins to turn, and by the end of the exam (long after student evaluations are submitted), they are thanking me. My favorite endorsement came from a group that stopped by after an exam; one of whom said, "We thought you were a total jerk but now we see what you've done. You've got to find a better way to make students understand this at the beginning of the semester."

Does it solve the problem? No. The passive students continue to "dominate" the classroom. The cone of silence remains, even when I use the lame attempt to "poll" the students on a problem answer. Years ago, when I had the time-wasting practice of calling on students (who were unprepared and hemmed and hawed until I gave up on them), a student asked me to refrain from calling on her because she was shy. I asked her if she would make that request of partners, judges, administrative hearing officers, clients, witnesses, and others. To this day I never quite figured out what she thought the practice of law would involve. And the notion of a "shy lawyer" continues to haunt me as a oxymoronic classic. In the New York Times article, Paul explains that many students were embarrassed to speak out in class, especially if it meant admitting they did not understand something, and that "They were petrified of looking dumb in the eyes of their classmates..." If the clickers push them past that point, great.

The typical post-modern student wants to be passive, to be fed information, and to regurgitate it. That's been the educational experience of most of these students. (Too) many of the teachers that these students have encountered, eager for high rankings on student evaluations, prefer to play to the crowd, placate the desires of students weaned on television, and refrain from pushing students to become active participants in their own education. (I'm not alone in this opinion, though I wonder why the author of Remembering the Old Lions (Chronicle of Higher Education, 2 Apr 2004 (subscription site)) had to use a pseudonym. Is it really that dangerous to criticize the negative consequences of the "pamper and coddle" approach?)

If indeed post-modern culture prevents a return to the days of holding students responsible by putting them on the spot, de-valuing their baseless complaints on student evaluations about work load and academic expectations, and failing those who fail, then perhaps getting them involved by "making the work fun" is worth the effort. The clickers are toy-like, they are almost identical to the TV remote with which the student is deeply familiar, they are snazzy and exciting, and they equalize the participation level at something other than zero. Faculty using the clickers claim that the students are enthusiastic about them. That's not a surprise. So surely it's worth a try.

In all fairness to Ann Althouse, there is a risk that some professors would use the clickers to acquire information from students that is inappropriate or that would be used in inappropriate ways. She wonders if it would be acceptable to collect political profiles, say, in a Constitutional Law course. Perhaps, but I'm not so sure that the political affiliations of law students are much of a secret, because we know who belongs to the Federalist Society and the various other organizations. But Ann is wisely warning us that taking polls through the clicker on the students' experiences (e.g., in Criminal Law, asking who has been arrested or used an illegal drug) is dangerous. The questions asked in the Sociology class featured in the New York Times article (race, household income) could be on the edge, but there are ways to track this sort of data by anonymous number rather than student name (especially because it would not and should not enter into evaluation in the same manner as responses to substantive legal questions).

By the way, the fact that Paul teaches tax has absolutely nothing to do with my positive response to the story. It does, however, assure me that clickers can be used effectively in my tax courses. Will the same be the case in my Decedents' Estates and Trusts course? Hopefully my law school will give me the opportunity to find out.

In the meantime, who else is using these? In what courses? What has been the experience? Let me know. You'll get some free press. If being hailed on my blog can be considered press. (It's free, that much is indisputable. And hold on those "you get what you pay for" comments. Be nice.)

Wednesday, April 28, 2004

More on the Marriage Penalty

The headline read "House: No More Marriage Penalty" on the FoxNews web site but thankfully the story itself gets it right. An interesting quote from a senior fellow at the Center on Budget and Policy Priorities, who concludes that the number of couples receiving a marriage bonus exceeds those who incur a marriage penalty. The Congress rejected an attempt to keep the alternative minimum tax from negating the effect of the legislation ostensibly reducing the marriage penalty. Fascinating. Congress trumpets "WE ARE LOWERING YOUR TAXES" and in fact the taxes (for 13 million taxpayers) don't go down. Too bad FTC and other truth-in-advertising laws don't apply to politicians.

The headline at the CNN web site pretty much got it right. The story itself is the same news feed from the Associated Press.

I couldn't find the story on the MSNBC web site. Drat. I wanted to see if all three major independent news web sites would use the same story and write different headlines.

The bill now goes to the Senate, which has not yet scheduled debate. So don't go spending the anticipated tax reductions quite yet. In fact, considering there's a good chance that this will be yet another tax reduction bill that doesn't reduce taxes for most taxpayers, it might be prudent to wait until a pro forma 2005 tax liability is generated for you by your tax software or by your tax advisor.

Who knows? By 2005 the entire tax playing field could be significantly different. Nowadays, in the tax world, 15 months into the future is as far away as 16 seems to a 13 year old who can't wait to get her drivers' license! Actually, it's as far away as the years Nostradamus contemplated, but it's too late in the evening to start trolling through his quattrains looking for hidden predictions of next year's tax laws. That's just a wee bit too goofy. Even for me.

The Marriage Penalty That Will Not Die!

Sounds like the name of a horror movie, except that it's not a movie but a real problem. For married people. And for unmarried people. Anyone who pays taxes, whether or not married, is affected by this issue, and really should take some time to understand it.

The marriage penalty gets a lot of attention. It plays well in the soundbites of politicians. If you listen to them (the soundbites), you might end up thinking that the problem has been solved. It hasn't been solved, and relying on soundbites and the chest-thumping self-declared hero-annointing of politicians who think that they are solving the problem (and that they are heroes for doing so) is dangerous. It causes people to be mis-informed. As an educator, I simply hate that. People being mis-informed, that is.

Today's Philadelphia Inquirer carries a report [go to the Philadelphia Inquirer site, search for "marriage penalty" and then log in (or register if need be (it's free))] explaining that the Democrats and Republicans are in "rare accord" on making the marriage penalty relief enacted in 2001 permanent.

Let's clarify what happened. In the 2001 tax legislation, an attempt was made to eliminate the marriage penalty by "equalizing" the 15% bracket and the standard deduction. To reduce the negative tax revenue impact, the changes, even though enacted in 2001, were scheduled to be phased in beginning in 2006. Legislation enacted in 2003 accelerated these changes to 2003 and 2004, and left them set aside for 2005, to be followed by another phased in beginning in 2006, which would make the changes fully in place by 2009, but under the terms of the 2001 legislation these changes would be "undone" in 2011. [If you ever wonder why the tax law is so complex, it's this sort of political maneuvering and gaming that shifts to taxpayers the compliance burden of deciphering what is behind the smoke and mirrors. All of this "it's there, later, no, now, but just part of it, and wait, then it's back, slowly, and yep, then it's gone" silliness is an attempt to make the budget impact appear to be less severe than it otherwise would be.] What's at issue now is legislation to leave these changes in place not only for 2004, but for 2005 through 2010. The 2011 "undoing" affects ALL of the changes made in the 2001 legislation, a list of provisions that reaches far beyond this marriage penalty issue. The legislation to "make the marriage penalty solution permanent" passed the House of Representatives earlier this week. Of course, it isn't permanent because of the 2011 problem.

Let's clarify something else. These changes soften the marriage penalty. They do not eliminate it. They cannot eliminate it. There are at least two dozen elements of the federal income tax law that contribute to the marriage penalty. There surely are more, because it's easy to miss things that are buried in the law and not labelled as such. The legislation in question affects two of those elements. Technically, there are multiple marriage penalties, and that, too, needs some attention to understand what is happening in Congress.

Is this confusing? Sure. If the folks reporting the news can't figure it out, how are taxpayers supposed to learn? (Easy. Keep reading my blog, haha. Better yet, enroll in a tax course.) For example, read what the Philadelphia Inquirer report says: "The provisions in the 2001 tax-reduction legislation that eliminated the marriage penalty are set to be gradually reduced starting next year and to expire by 2010 unless Congress extends them." Well, that's not correct. I'm sorry that I need to nitpick, but it's essential that readers understand what really is happening, and the preceding quote is incorrect in several ways. First, the provisions in the 2001 tax legislation did NOT eliminate the marriage penalty. It softened it a bit. And it didn't happen in 2001, but in a future year that eventually became 2003. Second, those provisions are not set to be gradually reduced starting next year. They end next year. Abruptly. Not gradually. Third, that's not the end of it. They are scheduled to gradually come back into the tax law and will be fully back in place in 2009. Fourth, they will expire in 2011, not "by 2010."

But there's a problem, and according to the report some Democrats (but I'm sure some Republicans also are on board) are pointing out that straightening out the mess involving the equalization of the 15% bracket and the standard deduction doesn't do a thing to solve the marriage penalty that afflicts lower-income taxpayers who claim the earned income tax credit. And they are correct. So the current tax legislation has been amended in an attempt to deal with THAT marriage penalty. One of the sponsors of that fix was a Republican, so there's no doubt that this is not a partisan issue. Unfortunately, the softening of the earned income tax credit marriage penalty (that afflicts lower income taxpayers) won't be fully in place until 2008. Why should those folks wait while married couples with higher incomes get more immediate relief? Perhaps money talks?

But there are more problems. Even with these changes, the marriage penalty will survive. Big-time. How big? Imagine two people who discover that by getting married their tax bills climb from $12,462 each (filing as unmarried individuals) to $37,135 when they file a joint return. I've put the computations on another web page (partly because this post is long enough already and partly because I yet haven't figured out how to get these into the blog in a sensible format). True, it's an extreme example, but it illustrates that tweaking the standard deduction does nothing for taxpayers who itemize their deductions, and whose marriage puts them into a higher bracket, triggers deduction and exemption phase-outs, and removes the active management loss exception to the passive loss rules applicable to rental property. And that's just a few of the tax law elements intensifying the marriage penalty. You'll note that this is an item I make available to students in my Introduction to Federal Taxation course at Villanova's Law School, and one of the best days of the semester is when I take them through this and observe the body language and hear the gasps (especially from the students who are seeing it for the first time in the classroom because they didn't bother to do their reading and prepare for class as required [which is another story for another day, even though it connects because it suggests an answer to the question, "Where do all these unprepared lawyers and legislators come from and how did they get to be that way?"] It gets even better. Keep reading.

The interaction of all these "marriage penalty elements" in the tax law with one another doesn't just cause marriage penalties. Marriage penalties afflict some married couples. Other married couples end up with what the scholars call the "marriage bonus." If one of the two individuals in the example of the marriage penalty ended up marrying a person with no income rather than a person with comparable income, the tax liability DECREASES. In the same example, the tax liability of $12,462 goes down to $8,425. The numbers are on that same other web page.

This is when the fun starts in the tax course. "So," I ask, "what effect is the tax law having?" The response is usually in the form of "Well, it seems that if you marry someone who stays home rather than working the tax system provides a reward, but if you marry someone who has income of more than some small amount, the tax system penalizes you." "Quite correct," I reply, "and do you think it is intentional?" They look at each other and part of the "welcome to adulthood" light bulb array turns on. It's fun. There have been years when students spontaneously cried out, without waiting to be recognized, "You're kidding" and "This *****." I do my best to convince them that it's not my doing (even though I'm a "tax person"), that it's not the fault of the IRS, but that it is ... yes ... the Congress.

Oddly, as a general proposition, the marriage penalty is not an issue for folks with very high income. Consider the marriage of two people earning two, three, ten million dollars a year. [Yes, we could be talking celebrity or celebrity-athlete marriage here, but you can figure those out for yourself. After all, THEY didn't write the tax law, and I doubt that "marriage penalty" is in their conversation.] The person earning several million dollars a year already is in the highest tax bracket, has had their deductions and exemptions fully phased out, and pretty much has already been subjected to the marriage penalty elements in the tax law. So the marriage doesn't have the same tax penalty impact as it does for two people earning 80, 90, 120, or 150 thousand dollars a year. Strange, isn't it? I'll leave aside for now, because this post is beginning to become a law review article, the impact of the alternative minimum tax which can put marriage penalty salt into its stealth tax wound.

When I updated that other web page from 2003 to 2004, I noted two things. First, the marriage penalty decreased by a few hundred dollars. Second, the marriage bonus increased. That is not surprising. Whatever is done to soften the marriage penalty intensifies the marriage bonus. That is why all the tweaking and twisting won't solve the problem.

So even though the pending legislation doesn't solve the problem, what little it does is expensive. It will cost at least $96 billion over 10 years, an amount computed without considering the recently added changes to soften the earned income tax credit marriage penalty. So, of course, the "how do we pay for this?" debate once again has jumped into the spotlight. Here it gets partisan. Oddly, it's the Democrats who want to cut spending (or, as I am sure is their preference, raise taxes) and it's the Republicans who rejected those ideas but who haven't explained what they plan to do other than let the deficit increase.

So what's the solution? Simple. Admit that marriage should have nothing to do with income taxes. I know that sounds blasphemous to some, but let's consider how marriage affects other taxes. A single person purchases a $300,000 home. That person pays a property tax, let's say, of $5,000 a year. If a married couple purchases that home, the property tax is $5,000. A single person eats dinner at a restaurant in Pennsylvania and orders $40 of food. The sales tax is $2.40. If two single persons have dinner together, and order $80 of food, the sales tax is $4.80. If the two people get married and return to the restaurant for another $80 dinner, the sales tax is, yes, $4.80. User fees generally are the same. Whether the two people in the car are married or not, the bridge toll is $3. There are some user fees, for example, the National Park fee, which provide discounts for "families" and I'll leave for another time the various arguments that can be made in favor of, and against, such discrimination against people who do not constitute families (e.g., widows and widowers).

An income tax is measured by taxable income, which should be some sort of "ability to pay" marker. Once upon a time, the justification for joint returns was the practice, in community property states, of splitting the income of the sole-wage-earning (usually) husband between the spouses, so as to get lower rates on each. After common law states enacted community property schemes to permit their citizens to use this technique, Congress codified the practice with the joint return. Big mistake. Throughout the Code there are provisions that state, "For purposes of ....., community property laws shall not be taken into account." (or terms to that effect). So there's no reason on this account for joint returns.

Defenders of the joint return point to the different financial dynamic of families. One argument is that the two spouses commingle their funds, so how could they possibly separate their finances into two returns. The answer is simple. Income is reported by the person on whose W-2 or 1099 reports it, and if it is a joint account, it is split. Deductions are reported by the person who made the expenditure, and if it is made from a joint account, it is split. Advocates of joint returns also suggest that married couples should incur lower tax liabilities because they have more expenses. I disagree that they necessarily have more expenses because they very well could be getting the benefit of economy of scale (after all, they probably have one home instead of two, and they still have two cars). The biggest expense would be the costs of raising children, a matter that should be addressed through adjustments to the deduction for dependency exemptions.

Ideally, at the same time Congress would junk the AMT, the phaseouts, most of the deductions and credits, increase the exemption amount per person to the poverty level, permit persons who don't need the exemption (because they have no or little income) to sell the exemption to others (just as corporations can sell pollution allowances), and lower the tax rate to a 2 or 3 tier structure that would provide serious progressivity when measured against gross income.

The chances of this happening? About as high as my getting elected to Congress to make the futile attempt to get such reform enacted. There are too many vested interests whose primary commitment, dedication and loyalty is to themselves, their cause, their organization, their political party, their wallet, and their friends, rather than to their country and the taxation ideals on which it was originally built.

So, go ahead. Believe the headlines. "Congress Eliminates Marriage Penalty." Then take a peek at your return. Run the numbers (or get someone to do that for you if you really, really hate or fear numbers, though I doubt you really do). Then decide who's inviting you to a good education and who's trying to con you.

Monday, April 26, 2004

How Private is Confidential?

I've never done a survey, and I haven't been able to find anything, but it seems to me that most taxpayers think that the information on their tax returns should not be disclosed by the IRS. Many probably think that it ought not be disclosed ever. I'm also guessing that many taxpayers have little confidence that their tax return information will remain private. Part of that, I think, is based on the stories that emerge from time to time about IRS employees "checking up" on their neighbors' or friends' tax returns, or from a general sense that one "cannot trust" the government.

As a general matter, the IRS is prohibited from disclosing tax return information. But the Internal Revenue Code provision imposing that restriction contains a long list of exceptions. The IRS is required to make a report each year to the Congress (technically, to the Joint Committee on Taxation) disclosing each instance it discloses tax return information under one of the exceptions.

The report for 2003 has been published. It covers disclosures made during 2003.

Total number of disclosures of tax returns or tax return information: 3,744,087,686. Yes, that is three BILLION plus. Keep in mind that roughly 125,000,000 federal income tax returns have been filed for each of the past few taxable years. So that's roughly THIRTY instances of disclosure for each tax return.

To whom are these disclosures made?

Leading the list are disclosures to state officials with responsibility for administering state tax laws. Of the 2,430,943,771 disclosures, most were made by sending extracts of Master File tapes (the digital record of the information filed on the return). At approximately 20 per return, these numbers reflect transmission to the states of information on items such as dividends, interest, property sales, business income, etc.

Next on the list are disclosures to the Bureau of Census and Bureua of Economic Analysis. There were 1,147,490,191 disclosures. I'm guessing that some or many of these were probably in the form of statistical summaries and groupings.

Third place went to disclosures to Congressional Committees and their agents, including the General Accounting Office. These disclosures cannot carry identifying information other than in closed executive session or with the written permission of the taxpayer. These disclosures, therefore, are most likely summaries of taxpayer filing "habits" with respect to particular types of transactions. Oh, there were 149,235,637 of these disclosures.

In fourth place, at 8,781,942, were disclosures to child support enforcement agencies. It's pretty clear what this is about, and it's pretty clear that identifying information is a necessary part of the disclosure. This disclosure is one of many exceptions falling into the "disclosure for purposes other than tax administration" category.

Fifth through seventh places were claimed by the three remaining categories that numbered in the millions: 2,809,898 to the General Accounting Office (to assist it in auditing the IRS and other agencies), 2,446,199 to the Department of Agriculture (to assist with agricultural censuses), and 2,305,866 to the tax treaty authorities of foreign countries. Surely this last batch included identifying information.

Then the numbers drop off significantly, but the identity of those to whom disclosure is made is a stark reminder that even if tax returns are filed carefully and honestly they can put a taxpayer in an awkward situation. Of course, if the tax return is filed dishonestly, it gets worse. Consider these statistics: 57,849 disclosures to U.S. Attorneys, the FBI, the Drug Enforcement Agency, and other law enforcement agencies, along with 455 disclosures to U.S. Attorneys of return information other than certain taxpayer information, 1,763 disclosures to apprise appropriate officials of criminal or terrorist activities or emergency circumstances, 1,724 to U.S. Attorneys in connection with ex parte orders, and 6 disclosures to Department of Justice employees preparing for or conducting grand jury proceedings.

Sometimes it's the taxpayer who triggers the release of information: 11,118 disclosures to persons designated by the taxpayer as approved to receive the disclosure (these are usually instances in which the taxpayer has lost tax returns and is letting his or her tax advisor obtain copies from the IRS).

So what taxpayers may not realize is that although their tax return information is confidential, and ought not appear on a web site somewhere, it doesn't simply "go to the IRS and stay there." Even if the system worked flawlessly (and I doubt that it does), information on the return finds its way to other places, sometimes tagged with the taxpayer's identity.

Is this bad? Not necessarily. The idea of using tax return information to track down child support deadbeats, to assist in the enforcement of state tax laws, to support criminal proceedings against a criminal, or to be used to improve the tax law and its administration (e.g., through audits of the IRS, reviews of taxpayer filing patterns) makes sense. Because this is being done, taxpayers ought to understand that the tax return is more than a tax return. It has elements of a census form, and creates a trail of evidence which should disturb those not abiding by the law (but which seems to bother law-abiding citizens far more than it does those who disregard the law).

Some folks do not like the idea that the IRS shares this information. One in particular is James Plummer, a Policy Analyst at Consumer Alert. He awarded the National Consumer Coalition Privacy Group's "Privacy Villain of the Week" designation to the IRS because of these disclosures. In his explanation, he makes some important points but then overstates the case against the IRS.

It is true, as he explains, that the IRS computer systems are "insecure and vulnerable to hackers." But whose fault is that? I continue, with little success, to help people understand that it is the Congress, perhaps in trying to keep taxes low (he says sarcastically), that doesn't appropriate sufficient funds (and then when it does try to deal with the situation, finds an IRS that has a variety of tax administration problems reflecting years of Congressional neglect).

And yes, the IRS (for reasons that baffle me and don't seem defensible) signed people up for junk mail. If you find this rather bizarre, take a look. And maybe the IRS web site uses too many third-party "cookies," as explained in this report, though I doubt that puts tax return information at serious risk of disclosure.

But I think that Mr. Plummer goes a bit overboard when he asserts that the disclosures to the Census bureau were made so that "pointy-headed bureaucrats can engage in social-engineering schemes designed to undermine the free market choices individuals make in their daily lives." There surely are social engineering schemes, but they're not hatched or cultivated in the Census Bureau. There are enough politicians out there buying votes by promising another goodie from Uncle Sam and theoreticians hiding behind think tank and academy walls conjuring up these schemes without any need for the Census Bureau to help out.

His claim that the disclosures made to the Department of Agriculture were "so that that Department's bureaucrats could actively work to control the market for food, which results in higher prices for consumers at the grocery store" startles me. If there is federal government interference afflicting the food markets (and I don't doubt that there is), it is a gift of, YES!, the Congress.

And, when he argues that the disclosures made to foreign taxing authorities "undermines foreign investment in America, resulting in a weaker economy, with fewer jobs, higher prices and less innovation." he overlooks the long-term inefficiency of attracting foreign investment by assisting individuals and corporations in tax evasion schemes. This nation should be selective in making decisions to lure businesses to operate within its borders. Refusing to turn down money no matter its source or its tax-evasion impact sells out the principles on which this nation was built. If the only way to attract foreign investors is to be a tax haven, then this nation is in horrendous shape.

Finally, Mr. Plummer's statement that "this disclosure habit of the IRS is just one way the bureau undermines privacy" suggests to me that he thinks the IRS is making these disclosures because it wants to do so. To the contrary. The IRS makes these disclosures because it is REQUIRED to do so. By the law. Law enacted by, c'mon, you can see this one coming a mile away, YES, the Congress. Does Mr. Plummer want the IRS to ignore the disclosure laws? If he does, he'd be advocating the very sort of non-compliance that he justifiably criticizes when he notes that the IRS has not cracked down the way it should and ought to crack down on IRS employees "browsing" tax return information of their friends and neighbors.

The IRS makes for an easy target. Congress helps make it an easy target. It takes the heat off Congress. Mr. Plummer, please don't let your important and valid points miss their mark by being directed at the IRS rather than the Congress. And please don't overstate your case because it distracts us from the genuine problems in the tax return disclosure area.

Of course, if we simplified the tax law, there would be far less information sent to the IRS. But that's another topic for another day.

Friday, April 23, 2004

AAG (Tax) Speaks at Harvard

.... and gets blogged.

Sounds bad, but it isn't. It's nice to show up in someone's blog. And that's what happened to Eileen O'Connor, Assistant Attorney General for the Tax Division at the Department of Justice. Her speech at Harvard Law School has been written up on Per Curiam, a law blog maintained by two students at Harvard. She addressed three topics: tax shelters, the "wall" between tax law enforcement and intelligence, and the use of John Doe summonses in tax cases.

Word of Warning: if you find yourself drifting to their affiliated Sports Law blog, you could end up browsing for hours. So don't go there 10 minutes before a meeting or class, because it will be tough to drag yourself away from the computer. Trust me, I speak from experience.

Getting it Right

No, that's not a political statement. It's about being correct. Oops, not politically correct. Tax correct.

The tax law is complicated. So complicated that many taxpayers shell out dollars to preparers and to tax software vendors because they cannot do the return without help.

Let's for a moment accept the tax world as it is. Tax law is complicated. Returns are difficult for the typical taxpayer to prepare. Commercial assistance is available but it comes at a price. Where does the taxpayer unable or unwilling to pay for assistance turn? Where does the confused preparer (yes, they exist) turn?

For taxpayers, there are VITA programs (Volunteer Income Tax Assistance) programs. Those programs don't exist everywhere. And where they do, they have a limited range of expertise.

Ah, let's contact the IRS. On Wednesday, the IRS Commissioner shared some information with the House of Representatives Appropriations Committee's subcommittee that handles IRS oversight.

When the IRS fields a phone call (it answers roughly 85 percent of them, so I guess the other 15 percent tire of waiting and hang up?), its representatives answered roughly 80 percent of the questions correctly.

They had started at a lower rate, apparently because the IRS changed the scripts that are used by the representatives to interview the folks calling for help. The drop-off in correctness compared to last year was so significant that the IRS re-wrote the scripts. This caused the correctness rate to climb back to within one percentage point of last year.

Before getting to the plans disclosed by the IRS for dealing with this, let's think about two things.

First, why are the IRS representatives using scripts? A person who knows the tax law doesn't need a script. A checklist, perhaps. The problem with a script is that it cannot predict the taxpayer's response. (I've dealt with software vendor representatives who use scripts, and it's almost laughable at times, because the person's second question often has nothing to do with my answer to the first question. It also reminds me of the football coach who scripts the first, say, 20 play. So if the quarterback is sacked for a 12-yard loss on second down, the team blunders forward with the halfback plunge because that's the next play in the script? Bizarre (except, in all fairness, most coaches using scripts have some flexibility built into their plan.)) My guess is that the scripts are being used by the IRS representatives because they wouldn't otherwise know what to say. And that brings me to the second concern.

Second, is 80 percent (give or take a few percentage points) acceptable when it is the government to whom the taxes are paid that is giving the assistance? My answer: no. There are places where 80 percent is phenomenal and unlikely to happen (think baseball batting average or basketball shooting percentage). But in the things that matter, how can 80 percent be acceptable? Of course, the IRS says it isn't and has plans to change it. Would our society accept an 80 percent successful surgery rate? Or 80 percent of traffic signals properly functioning? Or 80% of children in day care being returned safe and sound each day to their parents? No.

In my classes, I use 80 percent as a benchmark in grading. A student who can do at least 80 percent of what I could do on the exam earns an A. Why is 80 percent acceptable in that context? Because I'm dealing with a student (who may or may not intend or decide to practice in the subject matter). The student has had 14 weeks to learn a significant amount of material while also learning 4 or 5 other subject areas. The student is not being held out as a professional. The student is not being paid. The student does not, and should not, have the life or property of a client at risk.

I teach my students not so much the actual law but how to learn the law, because the law keeps changing. I teach my students how to identify the "bad habits" or tendencies that prevent them from attaining a correct response, and then assist them in making adjustments. It's similar to coaching.

Is the IRS training its representatives? Are the representatives being fed "information" which they don't process but simply read back from a script? Do the representatives UNDERSTAND the tax law or merely KNOW some rules? When the IRS says that it wants to make managers more accountable for improving services (that's half the plan), does it plan to have the managers do the teaching? If they're not, then it's the teachers who need to be held accountable. When the IRS says that it wants to set up teams to supervise the program, identify problems and set priorities (that's the other half of the plan), does it intend to emphasize training (or retraining) in one area at the expense of another?

Does the IRS have enough funding to handle the millions of calls that it receives? Would it have an easier time of it if Congress refrained from enacting so many complicated provisions and then tinkering with them each year? Is the 80 percent rate a combination of many representatives with rates in the upper 90s and a few with rates in the 40s? If so, is the IRS constrained from firing the representatives because of civil service protections? (Moving a representative to another position, even if the representative is more suited to that other position, leaves a gap in the phone answering team, because the IRS would need more resources to replace the representative.)

Who is being hired to be a representative? Someone who has been through a law school tax course or two? Someone with a college degree? A high school diploma?

How much training do the representatives receive? What sorts of exercises and active learning are used? Are the representatives taught to solve problems? Do they ever read the actual law, such as the Code or regulations? Are they using summaries of the law? If so, how accurate are those summaries?

Leave it to a teacher (by profession, by avocation, and by genetic heritage) to ask these sorts of questions, but it boggles my mind that the federal agency charged with having sufficient expertise to administer the tax law can get only 80% of the questions correct.

Tax law, fortunately or unfortunately, is not baseball or basketball. Eighty percent doesn't cut it. It's time, again, he says exasperatedly, for the Congress to step up to the plate and GET IT RIGHT.

Closing thought: I wonder if any member of Congress, doing his or her own return (hahahaha), called the IRS for help. I wonder if the answer that was provided was correct or incorrect. I wonder.

Wednesday, April 21, 2004

Well, Did He or Didn't He?

File his own tax returns, that is.

Who?

Roosevelt. Franklin.

I mentioned in my last post that when looking at the tax returns of several previous Presidents, it appeared to me that Franklin Roosevelt had done his own return. The handwriting and the signature show similar writing strokes and ink density.

I tried to research this, though I admit I haven't dug up all the published biographies of Roosevelt. A search of the web didn't produce much. (Among the links produced by the various search term combinations I used was a page explaining how George Bush, John Kerry, Hugh Hefner, and Franklin Roosevelt are related to each other. That's a totally different topic, and if you can't wait for me to dig into it, visit the Maule Family Genealogy page and click on the link to "My Cousins, the Presidents.")

The best I can find is a letter that Roosevelt sent to "my dear commissioner Helvering" [the famous (in tax circles) Guy T. Helvering, long-time commissioner of the Bureau of Internal Revenue (the predecessor of the IRS)] in which he asks for help doing the actual computation of tax liability. The logical inference is that he was indeed preparing his own tax returns. Though his characterization of the arithmetic needed to do the computation as "higher mathematics" is a bit exaggerated (perhaps deliberately so), I do admire his foray into self-compliance in the truest sense. It's not surprising the Roosevelt would not pay others to do what almost all Americans had to do themselves.

It is interesting that a law Roosevelt signed was the cause of the complexity that baffled him. Remember, there were no hand-held calculators or personal computers in his day. A President who experiences the impact of complexity is likely to disfavor additional complexity. Roosevelt's reaction to today's income tax law, congested with computational mazes and definitional labyrinths, would be interesting to see. Of greater interest would be his reaction to the fact that the President, Vice-President, and most (if not almost all) members of Congress do NOT prepare their own income tax returns. Of course, most citizens do not prepare their own returns. If trends predict the future, by 2010 most tax returns will be prepared in India.

Despite all the complexity, defended by its proponents as a necessary evil to bring fairness, the income tax continues to be saddled with the same sort of tax avoidance (chiefly by the wealthy) that at times infuriated Roosevelt. What would he say if he noticed that among the beneficiaries of the tax avoidance techniques available under our hypercomplex tax law were present and past Presidents of the Republic?

Maybe it's time for a "sign here if you think legislators should be required to do their own tax returns" with a "let's be nice and let them use Turbotax" option. Someone can teach me the technology or programming to set up that sort of "poll." What do you think?

Monday, April 19, 2004

CBO Report on AMT

The CBO has released a report on the alternative minimum tax, which is full of useful examples, explanations, graphs, and projections. The CBO website sometimes is slow, but it's worth re-trying if one has a deep interest in the topic. Many taxpayers should, because they are or will be paying this stealth tax, as I described and explained it in a previous posting.

Presidents and Taxes

As the first part of tax season rolled to an end (the second part ends August 15), the President, the Vice-President, and the presumptive Democratic Party presidential nominee released their 2003 tax returns, or at least principal parts of them. They can be found at the Tax History website.

With all the chatter about tax rates and whether (and on whom) they should be increased or decreased, the information provides some interesting insight. Quiz time: what do these numbers reveal about the types of income and deductions claimed by the taxpayers?

Do the computation for your own return. Where do you fit in the array? Of course, a better comparison
would also include the impact of social security and medicare payroll taxes. As a general proposition, the lower the adjusted gross income and the higher the proportion from wages and other earned income, the higher the overall tax rate in comparison to these returns.

Interestingly, it appears as though Franklin Roosevelt did his own return. The handwriting and ink seem to be the same. I don't have the time at the moment to research the question. Surely somewhere a biographer would have made note of it. I continue to think that anyone who votes to enact a tax should be obligated, constitutionally, to do his or her own tax return for that tax. This proposal is not so much an attempt to eliminate taxes (though surely most of the thousands that exist are best suited for the dust bin of history), but to encourage keeping the law simple, understandable, and favorable to compliance.

So, here we are, the first part of tax season is over. For those of you who have filed, may you proceed without hearing from the IRS (other than to receive any expected refund). For those of you who filed for an extension of time to file, and must file by August 15, may you proceed to get this behind you before it hangs around all summer like an unwelcome guest at the vacation rental home.

Friday, April 16, 2004

Numbers, Numbers, More Numbers

OK, so "tax day" is behind us. (Isn't every day a tax day?)

This posting is brief because I'm investing some time wandering around the newly released statistics at the TRAC IRS web site. There is statistical information on audits, enforcement, and aggregate tax return data. The folks at TRAC (Transactional Records Access Clearinghouse) released their ninth edition of TRACIRS just as the April 15 tax filing deadline appeared.

TRAC IRS is the source for the information about IRS audit rates that I discussed in a previous post. Rather than describe everything that is on the site, I urge you to visit. Take a good look at the county-by-county summaries of adjusted gross income, wage income, average number of dependents claimed per return, etc. They paint a very interesting picture of the nation, because tax information tells us a lot about the socio-economic condition of a county.

TRAC also has statistical information for about eight other agencies, including the FBI, ATF (Alcohol, Tobacco and Firearms), DEA (Drug Enforcement Agency), Customs, and the federal government generally.

It's a playground for people who enjoy numbers. A visit to the site ought to be a requirement of every civics course in the country. (Do they still teach civics?) A careful study of the site's information would be worthwhile for every citizen who wants his or her vote to be informed. There's a lot to learn, and TRAC surely fills the supply side of the equation.

Wednesday, April 14, 2004

John, How Can That Be?

Presumptive Democratic Presidential nominee John Kerry asserts that under his tax plan, "98 percent of Americans will get a tax cut."

Really?

Let's see. Does that include Americans who don't pay taxes?

OK, maybe what he meant to say was "98 percent of Americans who file tax returns will get a tax cut."

Uh, no, that won't work either. Americans who file tax returns on which tax liability is zero cannot get a cut in taxes.

OK, maybe what he meant to say was "98 percent of Americans who file tax returns that report a tax liability will get a tax cut."

OK, that might make sense.

Does it?

No. The only tax cut affecting individuals in Kerry's proposal is a tax credit for college education costs. This, of course, has no effect on the tens of millions of American taxpayers who are not paying college education costs. Perhaps their children are grown, or perhaps their children are too young for college, or perhaps their children chose not to attend college.

It's a wonderful soundbite, to claim that 98 percent of Americans would get a tax cut. It flat out cannot happen.

Kerry also claims that under his proposal "99 percent of American businesses... will get a tax cut." Does that include the corporations that aren't paying taxes? How do their taxes get cut? As I described in a previous posting, a majority of corporations don't have tax liabilities. Kerry knows this, because his proposal includes steps to curtail corporate tax shelters and increase corporate taxes. John, are you playing immovable object and irresistable force games with us?

Here we go again. Does Kerry mean "99 percent of American businesses that report tax liability will get a tax cut"? Maybe. It would be nice to know.

What's scary is that people hear these soundbites, and believe them. What's worse is that their electoral decisions are affected by them.

Of course, Kerry's presumed opponent has favored us with similar soundbites, so it's rather obvious that one prerequisite for being a politician or running for office is the ability to frame, or speak, soundbites that declare the impossible.

That settles it. I'm just flat out not qualified to run. I know too much about taxes.

And I'm also unwilling to sell out principles in order to make everyone my friend or to maximize popularity.

C'mon, Pennsylvania, You Can Do Better

Bear with this rant for a moment.

Several years ago, after filing a Pennsylvania S corporation income and franchise tax return for entity #1, I received a letter from the Pennsylvania Department of Revenue Bureau of Corporation Taxes asking for a copy of the federal income tax return for entity #1. The federal return must be included with the state filing, and I was certain I had included it, as I had done every year. "Oh well," I thought, "maybe I missed it." So I made a copy of the federal return, put in in an envelope (because the reply envelope provided by the Department is way too small), went to the post office, and sent it certified mail, return receipt requested.

A year passed. After filing a Pennsylvania corporation income and franchise tax return for entity #2 (an LLC), I again received a letter from the Pennsylvania Department of Revenue Bureau of Corporation Taxes asking for a copy of the federal income tax return, this time for entity #2. Could I have messed this up AGAIN? No, especially as I hadn't messed it up in the first place. (Years ago I created a chart indicating how many copies of each schedule in each return is needed, where it goes, etc., a technique I learned in college when working part-time for a long defunct accounting firm.) So again I made a copy of the federal return, put in in an envelope (because the reply envelope provided by the Department is way too small), went to the post office, and sent it certified mail, return receipt requested.

This past Friday I get a letter from the Pennsylvania Department of Revenue Bureau of Corporation Taxes. Guess what? Yep, they want a copy of the 2002 federal return for entity #3 (also an LLC). Now I know that something is wrong. I was very careful filing the 2002 returns (and the 2003 returns, which I had filed a few weeks before getting the letter concerning the 2002 return).

I'm doing other things so I leave the copying and mailing for this week. Good thing because on Saturday, guess what I get? YES!!! Another letter from the Pennsylvania Department of Revenue Bureau of Corporation Taxes. A different individual wants a copy of the 2002 federal return for entity #2.

Yesterday I made what is becoming an annual "fix the Department's mistakes" pilgrimage to the post office, shelling out close to $10 to send the two copies, one to one person and one to another person.

I included a copy of the Department's letter, on which I explained several things:

(1) I am absolutely certain a copy of the federal return was STAPLED with the Pennsylvania return, as the instructions provide.

(2) The Pennsylvania return apparently is showing up on the desk of the person in the Bureau of Corporation Taxes WITHOUT the federal return.

(3) That means that someone is REMOVING the federal return from the Pennsylvania return.

(4) That someone must be working in the Department of Revenue's Bureau of Receipts and Control.

(5) That someone must be opening the envelope, seeing a federal return stapled to the Pennsylvania return, thinking it must have been included by mistake, and removing it.

(6) That person must not know much about Pennsylvania tax law or filing, else that person would be working in one of the tax bureaus and not the Bureau of Receipts and Control.

(7) The person in the Bureau of Corporation Taxes asking for the copy of the federal return has no supervisory control over the "someone" in the Bureau of Receipts and Control.

So, now I must figure out to whom to send a letter explaining that the Pennsylvania Department of Revenue has a serious communication and process problem. At least it's not the FBI or CIA... they have their own problems, and no one has been killed.

But, c'mon folks in Harrisburg. You can do better than this? Or maybe you can't. Maybe this is just way too complicated. As in "leave the contents of the envelope alone and let the folks in the Bureau of Corporation Taxes deal with it."

I mentioned this tale to a practitioner friend. He said, "Oh, this happens all the time." He explained that the agency with the contracts to handle local income taxes routinely loses the attached federal return even though not only is it stapled, but my friend's practice is to put a legend "FEDERAL RETURN ATTACHED AS REQUIRED. DO NOT REMOVE" on the front of the return.

This isn't rocket science. It is a frightening thought to consider why people can't do such simple things as refraining from removing federal return copies that ought not be removed.

Monday, April 12, 2004

Tax Audits and Tax Compliance

Almost every fall, in the basic federal income tax course, a student will ask something like this: "How do they know that you had that income?" And a student will ask how the IRS decides which taxpayers should be audited.

The answer to the first question is fairly simple. Most transactions that generate income must be reported by the payor to the IRS. Think about W-2 forms, and the different versions of Forms 1099. A few types of transactions escape reporting, generally because they involve small amounts, and of course there's too much noncompliance on the part of some payors.

The answer to the second question is complex. The IRS has a variety of approaches to selecting tax returns for "audit." Keep in mind that an audit can be as simple as a computer program looking for matches between the W-2 provided by an employer and the reporting of the salary on the employee's tax return. An audit can be as complex as the eternal residence maintained by IRS auditors at the corporate headquarters of multinational corporations. Most audits are in between those two extremes. Audits can be handled by correspondence and they can take place face-to-face over a table at an IRS office. Again, there are variations between those two.

Although the IRS supposedly has not yet fully programmed its computers to match every W-2 and Form 1099, its computers are getting closer to that goal. At this level, many, and eventually most, tax returns will be audited. If one considers the computer's checking for arithmetic errors to be an "audit" (technically it isn't), then everyone's return is being "audited" though in a way that isn't surprising and that, more importantly, isn't delving into the correctness of the input numbers. It's only the computations that are being reviewed.

When it comes to audits, that is, checking on the validity of the amounts entered onto a return, the IRS should be using strategies designed to maximize the revenue outcome. It claims it does. One strategy is to focus on changes in the tax law. When the tax law is changed, tax returns with transactions within the boundaries of the tax law changes should be more likely to be audited. For example, if Congress adds a new deduction, the likelihood that most taxpayers and tax return preparers are not familiar with the provision increases the chances or errors and abuse, so tax returns claiming that deduction would get more attention.

Another strategy is to identify professions and occupations for which tax compliance is weak. The first batch included four groups, one of which was... ready? Lawyers!! Hmmm. Now there are several dozen occupations on the list.

Another strategy is to audit returns based on tips from citizens. High on the list are ex-spouses and soon-to-be ex-spouses ratting each other out. Also high on the list are tips from disgruntled employees.

Another strategy is to evaluate the status of each possible income, deduction, or credit in terms of the level of improper reporting associated with that item. For example, there are far more errors made in claiming the earned income tax credit than in claiming the standard deduction. The IRS has a system in which points are assigned to each type of income, deduction, or credit, and tax returns with higher point scores are more likely to be audited. This strategy has been difficult to apply in recent years. In order to determine which items are more likely to be reported incorrectly, the IRS needs to do full and complete audits of randomly selected returns. Whereas other audits focus on a particular item, these audits examine everything on the return, starting with the taxpayer's name and taxpayer identification number and ending with the last of each dollar or other amount entered onto the return. These audits consume much time, and for a taxpayer randomly selected to undergo such an audit, it is a nightmare. A few years ago, needing to update its scoring system, the IRS set out to do another batch of these random audits (they're not done every year). Taxpayers complained to Congress. Congress told the IRS not to do these audits. Why? They're too complicated and thus time consuming. Why are they too complicated? Because the tax law is complicated. Who made the tax law complicated? Goodness, the Congress. So the IRS is using old scoring that doesn't even include the hundreds of provisions added to the Code or amended during the past decade.

So is the IRS "getting to" the taxpayers it needs to check out? Or is it wasting its time auditing people whose returns are correct? Is the IRS doing enough audits? How would we know?

We know some things because the IRS releases information. A great place to get this information (and a lot of other government data) is the Transactional Access Records Clearinghouse which is affiliated with Syracuse University. I was invited, when TRAC was started, to be a beta tester. I recommended that it go forward, and at least this time, my prediction was correct. It has flourished. Go visit the site when you have a chance if you have any interest in government data, statistics, or even trivia to supply your dinner party conversation resource databank.

The TRAC report inspired an interesting article on MSNBC's web site. It contains much more information about related news, some of which has already found its way onto this blog in previous postings.

As expected, the debate isn't over the data but over its meaning and its relevance. Consider:

Percentage of business tax returns audited during Oct 1, 2002 to Sept. 30, 2003: 0.73 percent (that's 73 returns out of every 10,000).

Percentage of business tax returns audited during Oct 1, 1996 to Sept. 30, 1997: 2.62 percent (that's 262 returns out of every 10,000).

The odds are low in both instances, which helps explain why taxpayers tempted to ignore tax compliance are encouraged to succumb. The drop-off, though is severe. It's a 72 percent decrease in business tax return audits. It's easier to find a lottery winner among one's neighbors than to find someone whose business has been audited.

But most businesses are small, and so is it worth trying to find $5 or $50 of underreported tax liability? Isn't the big chunk of "missing revenue" to be found among the big corporations? Yes. How's the audit rate there?

Percentage of businesses with assets over $250 million audited during Oct 1, 2002 to Sept. 30, 2003: 28.98 percent.

Percentage of businesses with assets over $250 million audited during Oct 1, 1995 to Sept. 30, 1996: 33.68 percent.

That's not as much of a slide (14 percent) but it's a slide. It's no less encouraging to big companies than the overall slide is to taxpayers generally.

A decade ago, there were more than 1,000 tax fraud cases. In 2003 there were 538 tax prosecutions. In 1999 there were 247 civil tax fraud penalties, and in 2003 there were 170.

This sort of information makes it tough for the IRS to persuade taxpayers to comply, to file correct returns, and to push aside the urban legend that "everyone else is cheating on his or her tax return."

The IRS notes that the audit rate for individuals with income of at least $100,000 has increased 52% over the past two years. But most of this increase comes from the computer-generated letters checking returns for mistakes. The pace of 16 face-to-face audits for every 10,000 individual taxpayer returns continues.

What about sole proprietors, many of whom engage in small transactions not subject to Form 1099 reporting and some of whom engage in "pay cash, pay less" arrangements? In 2002, 114 sole proprietors out of every 10,000 were audited, and that fell in 2003 to 110 out of 10,000.

The IRS takes the position that increasing the number of audits is not the principal key to increasing compliance. Instead, it prefers to target tax scams, such as the "tax protestor" packages marketed by brave folks who file tax returns while encouraging others not to do so, as well as similar plans shared by folks who at least prove their consistency, though not their intelligence, by setting an example by refusing to file returns or by filing blatantly frivolous or false returns.

Apparently the IRS resources are being pumped into audits of corporations engaged in corporate tax shelter schemes. It takes an average of 7.5 months to figure out what's going on in the smoke and mirrors arrangements.

Where do those resources come from? Not from a Congress that keeps trying to show that penny-wise pound-foolish is its approach to government spending. No, those resources come from other areas within the IRS, principally audits of other taxpayers.

The proposed budget should add 600 business auditors and 4,400 other auditors, tax collectors, investigators, and the like. But even if Congress approves the requested budget (which I doubt it will), the IRS will STILL be fielding an audit staff that is 2,000 less than what it had in 1996.

As discussed in an an earlier posting on this blog, most of the increase in the IRS budget, if it gets it, will go to salary increases that Congress requires but does not fund. Anyone getting an idea here of who's responsible for this mess?

The TRAC information also shows that more than 600 top-notch revenue agents left the IRS last year. Although the number of individual returns has risen by more than 16 million, there are now roughly 16,500 revenue agents at the IRS. In 1995, there were more than 24,000.

Last week, Tax Notes reported that the IRS Oversight Board concluded that the IRS needs a budget increase twice what has been requested by the Administration. Of course, at least one member of Congress immediately criticized the Oversight Board's report.

And there's the root of the problem. Many members of Congress, eager to earn support among their constituencies, take an "anti-tax" posture that is more rhetoric than reason. Surely they don't advocate "no taxes." And surely they don't advocate "unenforced taxes." Or do they?

But perhaps these members of Congress simply are reflections of our society. Consider this analogy. Everyone "knows" that there's very little chance of being stopped for speeding on an interstate highway when driving at 5 or even 10 miles an hour over the limit. If highway police tried to enforce the speed limit without exception, there would be an outcry. It has happened. So, for years, drivers have edged their speedometers to 63 when the limit is 55. But during the past year or two, a few drivers are ramping their speeds up to 90 and 100. On urban interstates. Even during rush hour. Why?

The psychologists can jump in at this point. A little "cheating" on a tax return (such as padding an expense account) gathers the same hardly-noticed social disapproval as does a little "cheating" on the speed limit. But then along comes a group that takes the tax return noncompliance into the world of gross fraud, and a group that takes highway speed limit compliance into the world of gross stupidity.

The driver demonstrating the meaning of "sapiens sapiens" might be drunk or on drugs. Taxpayers may be driven to such behavior after dealing with their tax returns, but substance abuse hardly qualifies as a reason for tax noncompliance. The racing driver might be late, and a deadline-pushing taxpayer might makes some sloppy mistakes. But none of this is implicated in most of the tax noncompliance cases or highway madness.

What's implicated is the mushrooming of the "I'm special and more important than you" philosophy that has spawned itself from the "me generation" mentality of the 70s. Anti-authoritarian, noncompliant, socially offensive, and short-sighted in their thinking, these folks are tearing down the walls of civilization here at home. Politicians appear to be afraid of them. After all, many of them have money, power, and influence. Others simply figure that they'll "get theirs" by imitating the ones who have the money, power, and influence.

So before joining the chorus of those who condemn the anti-authoritarian, noncompliant, socially offensive, and short-sighted behavior of small groups of people in other nations, let's consider how we tolerate and succumb to the same sort of activity by small groups of people here at home. The first step in resisting a movement is refusal to join.

The major findings (quoting from the report, in which USCC means U.S.-controlled corporation and FCC means foreign-controlled corporation) include:

** A majority of all corporations reported no liabilities during these years [1996-200] with a higher percentage of FCCs doing so than SCCs, an estimated average of 71 percent and 61 percent, respectively. However, the results were reversed for large corporations with a greater percentage of large USCCs reporting no tax liability.

** A greater percentage of USCCs than FCCs reported tax liabilities of less than 5 percent of their total income, an estimated 94 percent and 89 percent, respectively, in 2000. The results were similar for large corporations. In 2000, an estimated 82 percent of large USCCs and 76 percent of large FCCs reported taxes of less than 5 percent of their total income.

** However, FCCs reported less tax liability per gross receipts than USCCs; in 2000, an estimated average of $11.88 in tax liability per $1,000 in gross receipts compared with an estimated $14.75 reported by USCCs. A similar relationship held for large corporations.

Keep in mind that for the period in question, 1996-2000, the U.S. (and much of the world) economy was robust, corporate profits rose, and the stock market ballooned.

Other data shows that by 2003, corporate taxes had fallen even further. They fell so far that there is only one year for which those receipts were lower: 1934. Moost of us weren't around then, but if we paid attention to our parents or our history books we know that 1934 was during the height of the Great Depression. It is unlikely corporate profits in 1934 were anything like those in 2003.

Here's the million dollar question. Or perhaps it is a billion dollar question.

If corporate taxes decrease while corporate profits increase, what are the corporations doing with the excess? If profits go from 30 to 40 and taxes drop from 15 to 8, the amount available after taxes increase from 15 to 32.

Let's see. Are corporations using this money to hire more employees? Hardly. Most of them are dismissing employees.

Are they using this money to improve their products? Not if the floor tiles I bought are any indication. Not if the Microsoft blue screen of death is representative. Ironically, automobiles and small trucks do appear to be getting better. Of course, they're more expensive.

Are the corporations using this money to increase charitable contributions? Not really. The tax law limits the corporate charitable contribution deduction to 5% of income so there's not much of a tax incentive to donate.

So where's the money going?

Some of it is flowing overseas to pay independent contractors to arrange for work done by laborers paid a fraction of what U.S. employees earn.

Could it be higher salaries for the CEOs and CFOs and COOs and other upper-level management? Higher salaries that permit them to set up foundations that are used to influence and control matters of social policy, government, and life generally in ways far more disproportionate than what the typical citizen can do?

The politicians need to be careful. This information isn't going to be easy to spin into anything other than what it says.

An addendum. As tough as the job market is, several railroads are scurrying about trying to find workers. Apparently there's a shortage of people who are qualified. Sorry about this, but when I read this news my first thought was, "Goodness, these people apparently haven't been trained."